Lithuania: IMF Commends Economic Growth

Washington, 16 July 1997 (RFE/RL) - The Executive Directors of the International Monetary Fund (IMF) are divided over whether Lithuania should begin shifting from its currency board to a standard central bank arrangement, but they are agreed that Vilnius has been making "considerable progress in reducing inflation and attaining strong economic growth.

The board's assessment of Lithuania's situation came in its "article four consultation," an annual IMF review of each member nation. Under a new policy, these previously secret reviews are released if the country involved approves. Lithuania is the first nation in the Europe and Central Asian region to agree to the release of its review.

The review begins with a team of IMF experts and officials visiting the country involved. That team noted that Lithuania's economy grew by an estimated 3.6 percent in 1996 while inflation was reduced to just over 13 percent by year-end and unemployment fell to 6.2 percent of the labor force.

Notably, said the IMF staff, Lithuania's inflation has continued to fall and it was below eight percent by the end of May 1997, reflecting continued progress in the first half of this year.

The staff noted that Lithuania's fiscal policy in 1996 remained largely unchanged, and that its tax policy reforms had helped fiscal adjustment. It said the rapid expansion of trade flows continued in 1996, with exports and imports growing by over 20 percent.

The staff also noted that government authorities had implemented major reforms of the energy sector - centered on the commercialization of major energy companies - leading to a reduction in unpaid bills and the elimination of delays for the payment of energy supplies from abroad.

The Executive Directors reviewed the staff report at the end of June and praised Lithuania for the progress it has made under the three year Extended Fund facility it began in October, 1994. Over the term of the loan, Lithuania can draw a total of about $182 million.

However, the director's stressed that in the period ahead, Lithuanian authorities need to increase domestic savings, speedily resolve problems in the banking system and deepen structural reforms, particularly in the areas of privatization, agriculture and social security provision. They said this was necessary if Lithuania is to "enhance prospects for more rapid and sustained growth."

They also suggested that Vilnius further broaden the tax base and address tax evasion problems. At the same time, the directors told the government to make sure that payments to the Social Insurance Fund are kept up while speedily reforming the fund and its rules.

The 24 people who sit on the IMF's board of Executive Directors each represents either a major nation - the U.S., Great Britain, Germany, Russia, and China are among those - or a constituency group of countries. In the report, the executive directors are not identified, but the report says there was disagreement among them on the advisability of Lithuania moving away from the currency board.

The report says "a few" of the executive directors considered it was appropriate given the authorities desire to develop increased central bank functions. However, the report says, "a few other directors wondered about the wisdom of moving away from the currency board arrangement, which has served as a key element in achieving financial stabilization" in Lithuania.

The directors who spoke against any change pointed out that the currency board had provided a credible monetary rule and that it could be adapted to deal with increasing financial sophistication. However, the directors underlined the importance of a well planned, publicly carried out exit from the currency board arrangement if that is what Lithuania eventually does.